Could ANZ 'pull back' from New Zealand?

Tuesday, 2 July 2019

ANZ could have a big impact on the New Zealand market if it followed through on a warning it might 'pull back' from its operations in this country.

ANZ group chief executive Shayne Elliott told the Reserve Bank it might review the 'size, nature and operations' of the business in New Zealand if the regulator went through with its proposed changes to bank capital ratio requirements.

The proposals, which could require the New Zealand banking sector to raise more than an additional $20 billion in capital to comply with the requirements, have met stiff opposition from the banks.

ANZ is the country's biggest bank, with almost a third of the home loan market and the biggest share of KiwiSaver.

**READ MORE:

* Kiwibank warns it could be starved under Reserve Bank plans

* ANZ warns Reserve Bank capital proposals will push banks towards housing

* ANZ's Kiwi problems on the radar for big investors**

It made almost $2 billion in profit in its most recent full financial year.

Banking commentator Claire Matthews, of Massey University, said reducing the extent of its New Zealand operations was one way of meeting the new capital requirements for any of the banks.

'Capital requirements are a ratio, so that means there are two ways to meet a higher capital requirement – either increase the capital, or reduce the assets (so the existing capital level represents a greater proportion of the assets).  ANZ, like any business, has multiple options on how to invest its capital.  If it is going to put more capital into its New Zealand subsidiary it has to be convinced that it will generate a level of return that at least matches the return available from alternative investments.'

She said it would be 'challenging' for the bank to leave the New Zealand market completely.

'It is questionable how easy they would find it to find a purchaser for the business.  Would another bank want to buy that large a share of the NZ market?  Would the return be sufficient, given the level of capital required, to make the investment attractive?  Even reducing the size of the business to fit the existing level of capital under higher regulatory requirements would be challenging, because 'someone' would have to be willing to take over the business.'

She said the bank could simply demand repayment of some or all of its loans but it would stand to lose out substantially if there was no other lender willing to give borrowers the money to repay the loans.

Her colleague, David Tripe, said Australian prudential requirements limited the proportion of capital they could have tied up in offshore subsidiaries. He said, if ANZ injected enough capital to sustain its current position in the New Zealand market  under the proposed new rules, it would be in breach of the Australian regulations.

Other banks would have to consider the same issue if they picked up any loans from ANZ, he said

​Infometrics chief forecaster Gareth Kiernan said the Reserve Bank proposals would have a contractionary effect on lending that could constrain New Zealand's potential to grow.

'What is uncertain is the magnitude of that effect, and whether the costs of those constraints are outweighed by the benefits. The difficulty is that the big banks arguably all have a vested interest to argue for as little regulation as possible, but they are also among the best placed to model and estimate the potential effects of the changes.

'The upshot is that operating a bank in New Zealand will become more costly and banks will be forced to charge higher lending rates to maintain their profitability. If they're not getting the return on their investment here, then they might as well go and concentrate on their operations in other countries. Borrowing will become more difficult or costly, which will have a constraining effect on growth.'

He said the proposals seemed likely to concentrate lending on housing because it was an area where risk weightings did not increase so much – 'despite a widespread acceptance that too much of New Zealand's investment capital tends to be tied up in housing'.